CONTROLLING INFLATION: A LONGER TIMETABLE

THE big riddle of inflation is growing steadily more perplexing. The question is not whether, but when, the overexuberant economy will be brought under control again by tight money, higher taxes and a surplus in the federal budget. Last week Paul W. McCracken, chairman of the White House Council of Economic Advisers, admitted that a full year of tight money might be needed to slow price inflation. That would mean that the swift rise in the U.S. cost of living may not begin to slacken markedly until January. The date represents a considerable stretch in the Administration's former timetable for halting soaring prices. As recently as June, the White House was promising such signs of economic slowdown any time after midyear. In two talks during the week, however, McCracken counseled the nation to be patient.

Contradictory Figures. All summer, key economic figures have been giving contradictory indications as to how well anti-inflationary efforts have been succeeding. The expansion rate of the overall economy has declined considerably; corporate profits and housing starts are off, and there are a few signs that consumers are beginning to curb their appetites for buying. During the first ten days of August, new-auto sales, for example, fell to an eight-year low for that period. On the other hand, personal income is rising sharply, and declining labor productivity means that manufacturers pay more in both labor and materials to produce the same items.

The economic confusion continued last week. The consumer price index for July rose at an annual rate of 6% . That was down from a 7.2% rate in June, but little comfort can be taken from the fact. The 3.6% rise in prices between January and July was the greatest for the period since 1951. But a special Federal Reserve Board study shows that businessmen plan little increase in spending for new factories and equipment during the rest of this year. Such outlays have been a major source of inflationary pressure, and for all of 1969 the Reserve Board expects capital spending to rise fully 12 1/2% to $72.2 billion. Most of that increase has already occurred, and the Board forecasts a spending rise of only $55 million during the fourth quarter as against a $3.1 billion jump in the second quarter.

The most important harbinger of gains against inflation was an easing of the high interest rates that have been increasingly pinching borrowers this year. The decline reflected a drop in corporate demand for loans to finance expansion and inventory accumulation, which in turn appeared to reflect a lessening of the inflationary psychology that has caused businessmen to borrow in anticipation of ever-rising costs and prices.

Cheaper at Auction. The interest declines were small but widespread. Rates on bankers' acceptances--corporate promissory notes issued to finance goods in transit or storage with payment guaranteed by a bank--fell by 1/4% to 8%. In the bond market, Treasury bills sold at an average 6.86%, down from a peak of 7.22% last month. Pacific Northwest Bell Telephone sold $75 million in debentures at 7 3/4% compared with a 7.9% rate on the last Bell System bond offering in July.

Annual interest rates on Eurodollars have fallen to 11 % from a peak of 13% , which was reached for a day or two in the second quarter. U.S. banks had been borrowing huge quantities of such dollars on deposit in Europe in order to meet their loan commitments at home. Lately the banks' appetite for such deals has been declining. Of more immediate interest to consumers, mortgage interest rates have declined ever so slightly. Mortgages auctioned off to private investors last week by the Federal National Mortgage Association brought an average yield of 7.8%, down from a peak of 8.1% in early July.

The prime rate on loans to businesses by major banks remains at a record 8 1/2%, but now bankers are talking of possible future cuts rather than further increases in the rate from which all other interest rates are calibrated. Gaylord Freeman, chairman of Chicago's First National Bank, goes so far as to predict that the prime rate may drop to 7 1/2% or even 7% by year-end. Most bankers and economists are more cautious. They warn that interest rates could yet bounce up again. So far, though, demand has been dropping more than it usually does in the summer.

Fears of Recession. The big fear among bankers is that the Federal Reserve will misinterpret the decline in interest rates, which bankers regard as a sign that tight-money policies are succeeding in cooling the economy. If the Board instead concludes that lower rates signify that the nation's money supply should be tightened even more, the resulting squeeze on banks could have serious repercussions. Bankers are not alone in believing that, at the worst, additional tightening could provoke a recession. Raymond J. Saulnier, Eisenhower's last chairman of the Council of Economic Advisers, warned last month that "we are as close as it is safe to get to the outer limits of monetary and credit severity."

Federal Reserve Board Chairman William McChesney Martin recently told Congress that high interest rates are "not a goal" of the Board's policy. He implied that he would be happy to see the economy lose enough steam to let rates fall. Still, there is scant chance that the Fed will ease its squeeze on money any time soon, if only because price increases are proving so difficult to arrest.

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